A set of floor plans for smaller houses with flexible room configurations was hailed Friday as a KB Home corporate hero, with executives crediting the product with increasing sales numbers and margins just when the company needed the help.
KB’s sales increased 62% in its third quarter ending Aug. 31, and its margins widened as well, “largely due to the success of our new product line,” CEO Jeff Mezger told analysts during an earnings conference call. “It meets the wants and needs of today’s home buyer at a price that is competitive with resales and foreclosures.”
The product, known as "The Open Series," “demonstrated the ability to maintain margins while reducing prices,” Mezger said. In some markets, the company was even able to raise the price of its Open Series homes.
It was a bright spot that distracted some from the fact that the company continued to lose money, though at a slower clip, in the quarter. KB posted a loss of $66 million or 87 cents a share, missing analysts’ 58-cent consensus.
Cutting the company’s sales, general, and administrative (SG&A) expenses remains a challenge for KB because of its steep decline in revenue, but the company managed to shave those costs down to 18.5% from 19.9% a year ago.
On the other hand, the Open Series creation, roll-out, and marketing demonstrate a nimbleness uncommon for a large production builder. The Open Series went from the drawing board in summer 2008 to what is expected to be half of all the company’s sales in its fourth quarter. It helped the builder retool the company from 40% first-time buyers in 2006 to 80% two years later.
“I believe this kind of operational speed is unprecedented,” Mezger said.
The company’s survival strategy for the downturn is built on first-time buyers. And grabbing that market has more to do with competing against foreclosures and sales of other existing homes than competing against other production builders, Mezger told analysts. The Open Series offers an energy-efficient house, with flexibility in its plans, built-to-order, at a comparable price point, in an acceptable time frame for those buyers, he said.
The company has been able to shave its delivery time to 4½ months, cutting 50 days from contract to close, Mezger said. Twenty five days were trimmed from sales to start of construction, an impressive achievement since most loans now are government-backed mortgages requiring more approval time than other home loans.
“They’ll (buyers) wait 4½ months to get the house of their dreams,” Mezger said.
KB is buying land again, concentrating on finished lots with small option deposits and flexible take-down terms that helps the company keep its cash and turn a profit more quickly on home sales. Still, the company is writing those lot purchase deals to hurdle rates of 27% to 30%, he said.
Mezger announced again that the company is moving back into the Washington D.C., market. “We have a foothold in the region through customer service operations, and we have high quality land assets to start building on,” Mezger said, adding it aligns well with the company’s southeastern growth platform.
“We like our product, our markets … and the trajectory we are on,” he said.
Teresa Burney is a senior editor at BIG BUILDER and BUILDER magazines.